Peak Petro-State - The Oil World In Chaos

Pity the poor petro-states. Once so wealthy from oil sales that they could finance wars, mega-projects, and domestic social peace simultaneously, some of them are now beset by internal strife or are on the brink of collapse as oil prices remain at ruinously low levels. Unlike other countries, which largely finance their governments through taxation, petro-states rely on their oil and natural gas revenues. Russia, for example, obtains about 50% of government income that way; Nigeria, 60%; and Saudi Arabia, a whopping 90%. When oil was selling at $100 per barrel or above, as was the case until 2014, these countries could finance lavish government projects and social welfare operations, ensuring widespread popular support. Now, with oil below $50 and likely to persist at that level, they find themselves curbing public spending and fending off rising domestic discontent or even incipient revolt.

At the peak of their glory, the petro-states played an outsized role in world affairs. The members of OPEC, the Organization of the Petroleum Exporting Countries, earned an estimated $821 billion from oil exports in 2013 alone. Flush with cash, they were able to exert influence over other countries through a wide variety of aid and patronage operations. Venezuela, for example, sought to counter U.S. influence in Latin America via its Bolivarian Alliance for the Peoples of Our America (ALBA), a cooperative network of mostly leftist governments. Saudi Arabia spread its influence throughout the Islamic world in part by financing the efforts of its ultra-conservative Wahhabi clergy to establish madrassas (religious academies) throughout the Islamic world. Russia, under Vladimir Putin, used its prodigious oil wealth to rebuild and refurbish its military, which had largely disintegrated following the collapse of the Soviet Union. Lesser members of the petro-state club like Angola, Azerbaijan, and Kazakhstan became accustomed to regular fawning visits from the presidents and prime ministers of major oil-importing countries.

That, of course, was then, and this is now. While these countries still matter, what worries these presidents and prime ministers now is the growing likelihood of civil violence or even state collapse. Take, for example, Venezuela, long an ardent foe of U.S. policy in Latin America, but today the potential site of a future bloody civil war between supporters and opponents of the current government. Similar kinds of internal strife and civil disorder are likely in oil-producing states like Algeria and Nigeria, where the potential for the further growth of terrorist violence amid chaos is always high.

Some petro-states like Venezuela and Iraq already appear to be edging up to the brink of collapse. Others like Russia and Saudi Arabia will be forced to reorient their economies if they hope to avoid such future outcomes. Whatever their degree of risk, all of them are already experiencing economic hardship, leaving their leaders under growing pressure to somehow alter course in the bleakest of circumstances -- or face the consequences.

A Busted Business Model

Petro-states are different from other countries because the fates of their governing institutions are so deeply woven into the boom-and-bust cycles of the international petroleum economy. The challenges they face are only compounded by the unnaturally close ties between their political leaderships and senior officials of their state-owned or state-controlled oil and natural gas industries. Historically, their rulers have placed close allies or even family members in key industry positions, ensuring continuing government control and in many cases personal enrichment as well. In Russia, for example, the management of Gazprom, the state-controlled natural gas company, and Rosneft, the state-owned oil company, is almost indistinguishable from the senior leadership in the Kremlin, with both groups answering to President Putin. A similar pattern holds for Venezuela, where the government keeps the state-owned company, Petróleos de Venezuela, S.A. (PdVSA), on a tight leash, and in Saudi Arabia, where the royal family oversees the operations of the state-owned Saudi Aramco.

In 2016, one thing is finally clear, however: the business model for these corporatized states is busted. The most basic assumption behind their operation -- that global oil demand will continue to outpace world petroleum supplies and ensurehigh prices into the foreseeable future -- no longer holds. Instead, in what for any petro-state is a nightmarish, upside-down version of that model, supply, not demand, is forging ahead, leaving the market flooded with fossil fuels.

Most analysts, including those at the International Monetary Fund (IMF), now believe that increases in energy efficiency, the spread of affordable alternative energy sources (especially wind and solar), slowing worldwide economic growth, and concern over climate change will continue to put a damper on fossil fuel demand in the years ahead. Meanwhile, the oil industry -- now equipped with fracking technology and other advanced extractive techniques -- will continue to boost supplies. It’s a formula for keeping prices low. In fact, a growing number of analysts are convinced that world oil demand will in the not-so-distant future reach a peak and begin a long-termdecline, ensuring that large reserves of petroleum will be left in the ground. For the petro-states, all of this means persistent pain unless they can find a new business model that is somehow predicated on a permanent low-oil-price environment.

These states vary in both their willingness and ability to respond to this new reality effectively. Some are too deeply committed to their existing business model (and its associated leadership system) to consider significant changes; others, increasingly aware of the need to do something, find almost insuperable structural roadblocks in the way; and a third group, recognizing the desperate need for change, is attempting a total economic overhaul of its oil economies. In recent weeks, examples of all three types – Venezuela for the first, Nigeria the second, and Saudi Arabia the third -- have surfaced in the news.

Venezuela: A Nation on the Brink

Venezuela claims the world’s largest proven reserves of petroleum, an estimated 298 billion barrels of oil. In past decades, the exploitation of this vast fossil fuel patrimony has ensured incredible wealth for foreign companies and Venezuelan elites alike. After assuming the presidency in 1999, however, Hugo Chávez sought to channel the bulk of this wealth to Venezuela’s poor and working classes by forcing foreign firms to partner with the state-owned oil firm PdVSA and redirecting that company’s profits to government spending programs. Billions of dollars were funneled into state-directed “missions” to the poor, lifting millions of Venezuelans out of poverty. In 2002, when the company’s long-serving managers rebelled against these moves, Chávez simply replaced them with his own party loyalists and the diversion of funds continued.

In the wake of the ousting of that original management team, the country’s oil production began to decline. With prices running at or above $100 per barrel, this initially seemed to make little difference as money continued to pour into government coffers and those missions to the poor kept right on going. What Chavez didn’t do, however, was create the national equivalent of a rainy-day fund. Little of the oil money was channeled into a sovereign wealth fund for more problematic moments, nor was any invested in other kinds of industries that might in timehave generated streams of non-fossil-fuel income for the government.

As a result, when prices began to drop in the fall of 2014, Chavez’s presidential successor, Nicolás Maduro, faced a triple calamity: diminished revenues for social services, scant savings to draw upon, and no alternative sources of income. Not surprisingly, as a new impoverishment spread, many former Chavistas lost faith in the regime and, in last December’s parliamentary elections, voted for emboldened opposition candidates.

Today, Venezuela is a nation living under an officially declared “state of emergency,” politically riven, experiencing food riots and other violence, and possibly on the brink of collapse. According to the IMF, the economy contracted by 5.7% in 2015 and is expected to diminish by another 8% this year -- more, that is, than any other country on the planet. Inflation is out of control, unemployment and crime are soaring, and what little money Venezuela had in its rainy-day account has largely been spent. Only China has been willing to lend it money to pay off its debts. If Beijing chooses to hold back when the next payments come due this fall, the country could face default. Opposition leaders in the National Assembly seek to oust Maduro and move ahead with various reforms, but the government is using its control of the courts to block such efforts, and the nation remains in a state of paralysis.

Nigeria: Continuing Disorder

Nigeria possesses the largest oil and natural gas reserves in sub-Saharan Africa. The exploitation of those reserves has long proved immensely profitable for foreign companies like Royal Dutch Shell and Chevron and also for well-connected Nigerian elites. Very little of this wealth, however, has trickled down to those living in the Niger Delta region in the south of the country where most of the oil and gas is produced. Opposition to the central government in Abuja, the capital, to which the oil income flows, has long been strong in the Delta, leading to periodic outbursts of violence. Successive federal administrations have promised a more equitable allocation of oil revenues, but a promise this has remained.

From 2006 to 2009, Nigeria was wracked by an insurgency spearheaded by the Movement for the Emancipation of the Niger Delta, a militant group seeking to redirect oil revenues to the country’s impoverished southern states. In 2009, when President Umaru Musa Yar’Adua offered the militants an amnesty and monthly cash payments, the insurgency died down. His successor, Goodluck Jonathan, a southerner, promised to respect the amnesty and channel more funds to the region.

For a while, high oil prices enabled Jonathanto make good on some of his promises, even as entrenched elites in Abuja continued to pocket a substantial percentage of the country’s petroleum income. When prices began to plummet, however, he was confronted with mounting challenges. Pervasive corruption turned people against the government, feeding recruits into Boko Haram, the terror movement then growing in the country’s northern reaches; money intended for soldiers in the Nigerian army disappeared into the pockets of military elites, subverting efforts to fight the insurgents. In national elections held a year ago, Muhammadu Buhari, a former general who vowed to crack down on corruption, rescue the economy, and defeat Boko Haram, took the presidency from Jonathan.

Since assuming office, Buhari has demonstrated a grasp of Nigeria’s structural weaknesses, especially its overwhelming dependency on oil monies, along with a determination to overcome them. As promised, he has launched a serious crackdown on the sort of corruption that is a commonplace feature of petro-states, firing officials accused of blatant thievery. At the same time, he has stepped up military pressure on Boko Haram, for the first time putting a crimp in that group’s brutal activities. Crucially, he has announced plans to diversify the economy, placing more emphasis on agriculture and non-fossil-fuel-related industries, which might, if pursued seriously, help diminish Nigeria’s increasingly disastrous reliance on oil.

In the cold light of day, however, the country still needs those oil revenues for the lion’s share of its income, which means that in the current low-price environment it has ever less money to fight Boko Haram, pay for social services, or pursue alternative investment schemes. In addition, Buhari has been accused of disproportionately targeting southerners in his fight against corruption, sparking not just fresh discontent in the Delta region but the rise ofa new militant group -- the Niger Delta Avengers -- that poses a threat to oil production. On May 4th, the Avengers attacked an offshore oil platform operated by Chevron and the Nigerian National Petroleum Corporation, forcing the companies to shut down production of about 90,000 barrels per day. Add that to other insurgent attacks on the country’s oil infrastructure and the Nigerian government is expected to lose $1 billion in May alone. If repairs are not completed on time, it may lose an equal amount in June. It remains a nation on edge, in danger of devastating impoverishment, and with few genuine alternatives available.

Saudi Arabia: Seeking a New Vision

With the world’s second largest reserves of oil, Saudi Arabia is alsothe planet’s leading producer, pumping out a staggering 10.2 million barrels daily. Originally, those massive energy reserves were owned by a consortium of American companies operating under the umbrella of the Arabian-American Oil Company (Aramco). In the 1970s, however, Aramco was nationalized and is now owned by the Saudi state -- which is to say, the Saudi monarchy. Today, it is the world’s most valuable company,worth by some estimates as much as $10 trillion (10 times more than Apple), and so a source of almost unimaginable wealth for the Saudi royal family.

For decades, the country’s leadership pursued a consistent political-economic business plan: sell as much oil as possible and use the proceeds to enrich the numerous princes and princesses of the realm; provide lavish social benefits to the rest of the population, thereby averting popular unrest of the “Arab Spring” variety; finance the ultra-conservative Wahhabi clergy so as to ensure its loyalty to the regime; finance like-minded states in the region; andput aside money for those rainy-day periods of low oil prices.

Saudi leaders have recently come to recognize that this plan is no longer sustainable. In 2016, the Saudi budget has, for the first time in recent memory, moved into deficit territory and the monarchy has had to cut back on both its usual subsidies to and social programs for its people. Unlike the Venezuelans or the Nigerians, the Saudi royals socked away enough money in the country’s sovereign wealth fund to cover deficit spending for at least a couple of years. It is now, however, burning through those funds at a prodigious rate, in part to finance a brutal and futile war in Yemen. At some point, it will have to sharply curtail government spending. Given the youthfulness of the Saudi population -- 70% of its citizens are under 30 -- and its long dependence on government handouts, such moves could, in the view of many analysts, lead to widespread civil unrest.

Historically, Saudi leaders have been slow to initiate change. But recently, the royal family has defied expectations, taking radical steps to prepare the country for a transition to what’s being termed a post-petroleum economy. On April 25th, the powerful Deputy Crown Prince, Mohammed bin Salman, unveiled “Saudi Vision 2030,” a somewhat hazy blueprint for the kingdom’s economic diversification and modernization. Prince Mohammed also indicated that the country will soon begin to offer public shares in Saudi Aramco, with the intention of raising massive funds to invest in and create non-oil-related Saudi industries and revenue streams. On May 7th, the monarchy also abruptly dismissed its long-serving oil minister, Ali al-Naimi, and replaced him with the head of Saudi Aramco, Khalid al-Falih, a figure deemed more subservient to Prince Mohammed. Falih’s job title was also changed to minister of energy, industry, and mineral resources, which was (so the experts speculated) a signal from the monarchy of its determination to move beyond exclusive reliance on oil as a source of income.

This is all so unprecedented that there is no way of predicting whether the Saudi royals are actually capable of bringing anything like Saudi Vision 2030 to fruition, no less moving away in a serious fashion from its reliance on oil. Many obstacles remain, including the possibility that jealous royals will push Prince Mohammed (and his vision) aside when his father, King Salman, now 80, passes from the scene. (There are regular rumors that some members of the royal family resent the meteoric rise of the 31-year-old prince.) Nevertheless, his dramatic statements about the need to diversify the kingdom’s economy do show that even Saudi Arabia -- the petro-state par excellence -- now recognizes that some kind of new identity is now a necessity.

The Stakes for Us All

You may not live in a petro-state, but that doesn’t mean you don’t have a stake in the evolution of this unique political life form. From at least the “oil shock” of 1973, when the Arab OPEC members announced an “oil boycott” against the U.S. for its involvement in the Yom Kippur War, such countries have played an outsized role on the world stage, distorting international relations, and -- in the Greater Middle East -- involving themselves (and their financial resources) in one conflict after another from the Iran-Iraq War of 1980-1988 to the wars in Yemen and Syria today.

Their fervent support for and financing of favored causes -- whether it be Wahhabism and associated jihadist groups (Saudi Arabia), anti-Westernism (Russia), or the survival of the Assad regime in Syria (Iran) -- has provoked widespread disorder and misery. It will hardly be a tragedy if a lack of funds forces such states to pull back from efforts of this sort. But given the centrality of fossil fuels to our world for the last century or more, the chaos that could ensue in the oil heartlands of the planet from low oil prices and high supply is likely to create unpredictable new nightmares of its own.

And the greatest nightmares of all lurk not in any of this but in the inability of these states and those they supply to liberate themselves from reliance on fossil fuels fast enough. Looking into the future, the demise of petro-states as we’ve known them could have a profound impact on the struggle to avert catastrophic climate change. Although these states are not primarily responsible for the actual combustion of fossil fuels -- that’s something we in the oil-importing countries must take responsibility for -- their pivotal role in fueling the global petroleum economy has made them largely resistant to international efforts to curb emissions of carbon dioxide. As they try to repair their busted business model or collapse under the weight of its failures, we can only hope that the path they follow will entail significantly less dependence on oil exports as well as a determination to speed up the conclusion of the fossil fuel era and so diminish its legacy of climate disaster.

Tidefighter, everybody here should be excessively pissed with you that first we went into iraq, knowing what we know now, and next that we prolonged the whole shithouse by leaving into a vacuum, thereby negating all the blood and money.

Who can take this shit? Well everybody seems to be handling it, we'll see Nov'16 or never.

Perhaps the solution to this global conundrum causing untold misery upon millions of people is to wrest control of the fossil fuels from inefficient nation states and cede it to a global governance commitee consisting of the most salubrious and ethical corporations equipped to handle such a volitile resource, for the benefit of all...

I'm very sorry for your loss. It was also about heroin as the military protects the Afghan poppy fields and Turkey is used for processing and that is the Bush/Clinton crime families and now we have a heroin epidemic killing more kids and destroying families...God helpus all.

Tesla revealed free energy, proved it mathematically and physically with multiple devices (Wardencliff), then was murdered by George Scherf (aka, Prescott Bush, the last one to see him alive), and the Khazar bloodline families have both suppressed his discoveries and controlled everything since under the Petro-Pharma-Military-Banking-Industrial Complex...

I'll just add this little bit of trivia, Bell did not "invent the telephone" as so many were taught in publik skool. It was Antonio Santi Giuseppe Meucci, he just couldn't afford the price of "admission" to claim it.

I've often wondered (as a philosophical-societal question) what would happen if everyone realized half of the shit they think they know because they were "taught" that it was true were actually...a lie.

I am truly sorry to hear of family members who have died in Iraq. I recently saw military funeral in Dallas, TX with honor guard on airport tarmac. Very sad and my heart really goes out to those who have sacrificed.

With regards to "Broken Oil Markets", all evidence suggests these markets are very broken with demand/supply imbalances everywhere. America has no energy policy. We are attacking coal industry, mining industries and natural gas industries in mass. America is like a ship without a rudder. Maybe TRUMP can stear the American ship away from the rocks.

Zero pity for improvident petrostates. A nation nets what the aggregate of its intelligence and its moral character deserves. I don't see any whingeing news coming out of Norway seeking to blame that people's sudden disarray on falling commodity prices. National economy should be forced to conform to the principles of personal economy to which we mere mortals are held. Stay in the black, and lay in a store against the vicissitudes of the future. Somehow I imagine that a place like Nigeria might be better governed and happier if its fate were in the hands of the Chevron board.

Love the author's maddeningly arrogant and insouciant assumption that Russia being "anti-Western" and Iran trying to prop up Syria is somehow unseemly and wicked. I too would be anti whoever was trying to excise me from the fabric of existence. I know that just makes me an extremist and no doubt also a racist and a wicked wicked baddypants. I'm trying to get better, but what I can't get over is that in the worldview of the fake dissenters to the AngloZionist consensus, survival itself is evil unless you are the only one doing it. Competition being a sin and all that. Somehow differing ways of life and of governance fail to get lumped in with the benefits, sung otherwise to the high heavens, of diversity. But I'm sure these problems will just work themselves out if we worship our masters more faithfully. The world may have been destroyed through our effort at reform, but that may just be what it takes to have a fucking unsullied mind and the like.

So, these would be the chem-trails released to block sunlight to "save the fucking planet" (or alternately trap heat to kill the planet) or the chem-trails released because the "releasers" are living in underground bunkers so as to be not exposed to chem-trails?

No, these would be the "chemtrails" that both act as a "conductor" (Barium and Aluminum") for "standing microwave" technology (like HAARP) to manipulate the weather, and access most technology from a distance....

They have a wonderful third effect...population control..."slow kill"...starts with memory problems and "amotivational syndrome"...

Now I'm the one that's confused. Is the laziness associated with C. Sativa of C. Indica? I would suggest putting AM and PM on the packaging but that would further confuse those attending all those late night sacraments.

Sure they did. SA owns US refinery interests, political mechinations on both sides of the aisle and plenty of "good will" to continue military operations at their and their partners whims. The National mall has had a perpetual "For Sale" lawn sign on it since before Realtors knew to trademark their profession.

The problem with the sale is this FSBO action will only work if the owners our (s)elected officials sold it for allow them to get away with it.

If the story and associated headline is true, then all is needed is some ISIS (cough cough CIA) disruption to the supply; a few refineries would do the trick. What happened to crippling the Russian economy? What plan are they on; is it at "Plan Z" yet?

If you know anyone who has taught in Saudia Arabia you know that that place is fucked. It's back to goat herding for those boys. I'm gonna enjoy the Saudi goatbangers going at one another, nice karma for all the shit they created in the world. I wonder if we can send 0bama, Hillary and others there in exile......

Yes Dg years of opportunity flush with cash to diversify but pure complacency and readiness to take the easy options, rest on their laurels and expectation of the oil price to remain above $100 forever.

Same strategy that Goldman , JPM & Co. delivered with the Subprime Mortgages fiasco of never ending increases in house price in their business models.

Fortunately the Banks were bailed-out; No such soft landing for main-street.

"[...] what worries these presidents and prime ministers [of oil states] now is the growing likelihood of civil violence or even state collapse."

They will only have themselves to blame, no one else.

It'll be fun to watch Saudi Arabia falling into chaos and civil war as the dispossessed get revenge on a bunch of despotic sub-human savages who have abused their own people and beheaded quite a few of them for nothing else than exercising free speech.

Contrary to Zerohedge and the MSM's barrage of "OIL CAN ONLY GO DOWN IN PRICE" propaganda, it is simply common sense--is it still "common" if the vast majority are mindless morons who accept the propaganda without question--that we are one event away from an oil shock like nothing ever experienced. For example, take Saudi offline and oil would go parabolic instantaneously, and that would, perhaps, just compensate the purchasers of hedges against that event for the increase in all other prices--except real estate, stocks and bonds, which would essentially be little more than free. The last thing to lose value will be energy; if it goes, we're fucked. Everyone is fucked.

Foxconn sacked 60,000 Chinese and replaced them with robots. Adidas is building a factory in Germany's Ansbach to produce shoes with robots.

They need energy. What is unclear is to whom they want to sell their wares because when everybody is unemployed or on the minimum wage, they don't buy much. Portugal and Spain are very active in building up renewable energy capacity so there's one bright spot in Europe. America is ill advised to export oil and gas; one day people will say 'you shipped it all offshore'.

""At the peak of their glory, the petro-states played an outsized role in world affairs."" They all need to learn that friendships and influence cease when the money runs out. Allies walk when the money is gone. It's an old wisdom in everybody's life, but those born with a silver spoon up their ar9e have never experienced these ups and downs. When you cannot pay your allies and underlings any more -there's a re-arrangement.

The Chinese are light years ahead of the American subnormal IQ* deviant elite** criminals. The Chinese made around $50 billion in loans around the world to poor oil exporters and are now being repaid in crude oil at about 3X the volume at the time the loans were made. America's subnormal IQ deviant elites spent at least $3 trillion in treasure, thousands of lives and tens of thousands of wounded, we are reaping blowback in terrorism worldwide and we did not get to keep any of the oil. Further evidence that American subnormal IQ deviant elite criminals are an existential threat to not only the American People but the rest of the world's peoples as well. Way to go you bunch of fucking morons!

* subnormal IQ: fucking morons
** deviant elites: the ruling classes of criminals who are above the reach of the law that applies to the vast majority of the American People and who break the Law with impunity and in utter contempt for the American People.